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European Monetary System

The European Monetary System (EMS) was a multilateral adjustable exchange rate agreement in which most of the nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations in relative value. It was initiated in 1979 under then President of the European Commission Roy Jenkins [citation needed] as an agreement among the Member States of the EEC to foster monetary policy co-operation among their Central Banks for the purpose of managing inter-community exchange rates and financing exchange market interventions.[1]

The EMS functioned by adjusting nominal and real exchange rates, thus establishing closer monetary cooperation and creating a zone of monetary stability.[2][3] As part of the EMS, the EEC established the first European Exchange Rate Mechanism (ERM) which calculated exchange rates for each currency[1] and a European Currency Unit (ECU): an accounting currency unit that was a weighted average of the currencies of the 12 participating states.[4][5] The ERM let exchange rates to fluctuate within fixed margins, allowing for some variation while limiting economic risks and maintaining liquidity.[6]

The European Monetary System lasted from 1979 to 1999, when it was succeeded by the Economic and Monetary Union (EMU) and exchange rates for Eurozone countries were fixed against the new currency the Euro.[7] The ERM was replaced at the same time with the current Exchange Rate Mechanism (ERM II).

  1. ^ a b Alogoskoufis, George; Giavazzi, F.; Giovannini, A. (1991). "Limiting Exchange Rate Flexibility: The European Monetary System". Economica. 58 (230): 261. doi:10.2307/2554656. ISSN 0013-0427. JSTOR 2554656.
  2. ^ Liberto, Daniel. "European Monetary System (EMS) Definition". Investopedia. Retrieved 2020-03-27.
  3. ^ van den Bempt, Paul; de Grauwe, Paul (1987). The European Monetary System : towards more convergence and closer integration. Acco. ISBN 90-334-1600-X. OCLC 18291716.
  4. ^ Hayes, Adam. "Understanding Exchange Rate Mechanisms (ERMs)". Investopedia.
  5. ^ Kenton, Will. "European Currency Unit (ECU)". Investopedia.
  6. ^ MacDonald, Ronald; Taylor, Mark P. (1991). "Exchange Rates, Policy Convergence, and the European Monetary System". The Review of Economics and Statistics. 73 (3): 553. doi:10.2307/2109585. ISSN 0034-6535. JSTOR 2109585.
  7. ^ Höpner, Martin; Spielau, Alexander (2017-09-14). "Better Than the Euro? The European Monetary System (1979–1998)". New Political Economy. 23 (2): 160–173. doi:10.1080/13563467.2017.1370443. hdl:11858/00-001M-0000-002D-E71E-4. ISSN 1356-3467. Text was copied from this source, which is available under a Creative Commons Attribution 4.0 International License.

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